<PAGE>



                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549


                             ______________________

                                    FORM 10-Q

(Mark One)
              (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the Quarterly Period Ended June 30, 2001

                                       or

              ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

        For the transition period from _______________ to _______________

                         Commission File Number 0-30539

                                   TVIA, INC.

             (Exact name of registrant as specified in its charter)

               Delaware                                      77-0549628
               --------                                      ----------
    (State or other jurisdiction of                       (I.R.S. employer
    incorporation or organization)                     identification number)

                4001 Burton Drive, Santa Clara, California 95054
               (Address of Principal Executive Offices) (Zip Code)

       Registrant's telephone number, including area code: (408) 982-8588


                             ______________________

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X  No __
                                             ---

On July 31, 2001, 21,839,449 shares of the Registrant's Common Stock, $0.001 par
value per share, were outstanding.

<PAGE>

                            TVIA, INC. AND SUBSIDIARY

                                    FORM 10-Q

                      QUARTERLY PERIOD ENDED JUNE 30, 2001

<TABLE>
<CAPTION>
                                                     INDEX                                                       Page
                                                                                                                 ----
         <S>                                                                                                     <C>
         Part I:  Financial Information

         Item 1:  Financial Statements

                  Condensed Consolidated Balance Sheets June 30, 2001 and March 31, 2001                            1

                  Condensed Consolidated Statements of Operations for the Three Months Ended June 30,
                  2001 and 2000                                                                                     2

                  Condensed Consolidated Statements of Cash Flows for the Three Months Ended
                  June 30, 2001 and 2000                                                                            3

                  Notes to Condensed Consolidated Financial Statements                                              4

         Item 2:  Management's Discussion and Analysis of Financial Condition and Results of Operations             8

         Item 3:  Quantitative and Qualitative Disclosures About Market Risk and Interest Rate Risk                20

         Part II: Other Information

         Item 1:  Legal Proceedings                                                                                20

         Item 2:  Change in Securities and Use of Proceeds                                                         20

         Item 3:  Default upon Senior Securities                                                                   20

         Item 4:  Submission of Matters to Vote of Security Holders                                                20

         Item 5:  Other Information                                                                                20

         Item 6:  Exhibits and Reports on Form 8-K                                                                 21

         Signature                                                                                                 21

         Exhibit Index                                                                                             22
</TABLE>



                                       i

<PAGE>




                         PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

                            TVIA, INC. AND SUBSIDIARY
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                       JUNE 30,          MARCH 31,
                                                                         2001              2001
                                                                         ----              ----
                                                                     (unaudited)
<S>                                                                  <C>                <C>
ASSETS
Current Assets:
   Cash and cash equivalents                                         $   15,492         $   21,267
   Short-term investments                                                27,876             25,415
   Accounts receivable, net                                               1,183              1,941
   Inventories                                                            2,110              4,343
   Other current assets and prepaid expenses                              1,220              1,352
                                                                     ----------         ----------
     Total current assets                                                47,881             54,318

Property and Equipment, at cost:                                          4,261              3,507
     Less accumulated depreciation and amortization                      (1,770)            (1,533)
                                                                     ----------         ----------
                                                                          2,491              1,974
Other Assets                                                              2,184              1,143
                                                                     ----------         ----------
       Total assets                                                  $   52,556         $   57,435
                                                                     ==========         ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
    Accounts payable                                                 $    1,000         $    1,132
    Accrued liabilities and other                                         2,700              2,881
                                                                     ----------         ----------
     Total current liabilities                                            3,700              4,013

Commitments and contingencies (Note 7)
Stockholders' Equity:
   Common stock                                                              22                 22
   Additional paid-in-capital                                            90,990             90,976
   Warrants to purchase common stock                                      1,099              1,099
   Deferred stock compensation                                           (1,774)            (2,167)
   Accumulated comprehensive income                                         123                148
   Accumulated deficit                                                  (40,944)           (35,996)
   Treasury stock                                                          (660)              (660)
                                                                     ----------         ----------
Total stockholders' equity                                               48,856             53,422
                                                                     ----------         ----------
Total liabilities and stockholders' equity                           $   52,556         $   57,435
                                                                     ==========         ==========
</TABLE>


            See Notes to Condensed Consolidated Financial Statements.





                                       1

<PAGE>

                            TVIA, INC. AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                    (in thousands, except per share amounts)

                                   (Unaudited)

<TABLE>
<CAPTION>
================================================================================
                                                            THREE MONTHS ENDED
                                                                 JUNE 30,
--------------------------------------------------------------------------------

                                                             2001         2000
                                                             ----         ----
<S>                                                        <C>         <C>
Total revenues                                             $  2,463    $  3,533

Cost of revenues                                              3,611       1,876
                                                           --------    --------
   Gross profit                                              (1,148)      1,657

Operating expenses:
   Research and development                                   2,658       1,254
   Sales, general and administrative                          1,321         988
   Amortization of deferred stock compensation                  393         637
                                                           --------    --------

Total operating expenses                                      4,372       2,879
                                                           --------    --------
   Operating loss                                            (5,520)     (1,222)

Other income (expense), net:
   Interest income                                              572          66
   Interest expense                                               -         (78)
   Amortization of debt guarantee costs and other                 -        (245)
                                                           --------    --------

   Other income (expense), net                                  572        (257)
                                                           --------    --------
   Net loss                                                  (4,948)     (1,479)
                                                           --------    --------
Dividend related to convertible preferred stock                  --         671
                                                           --------    --------
   Net loss attributable to common stockholders            $ (4,948)   $ (2,150)
                                                           ========    ========
Basic and diluted net loss attributable to
   common stockholders                                     $  (0.23)   $  (0.42)
                                                           ========    ========
Shares used in computing basic and diluted net loss
   attributable to common stockholders                       21,493       5,152
                                                           ========    ========
</TABLE>

________________________________________________________________________________
         See Notes to Condensed Consolidated Financial Statements.






                                       2

<PAGE>

                            TVIA, INC. AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED
                                                                JUNE 30,
                                                       -------------------------
                                                               (unaudited)
                                                             2001        2000
                                                             ----        ----
<S>                                                    <C>             <C>
Net cash used in operating activities                     $ (1,533)    $ (3,023)
                                                          ---------    ---------

Cash flows from investing activities:

    Purchases of available-for-sale investments             (2,460)          --
    Purchases of license technology                         (1,042)          --
    Purchases of property and equipment                       (754)        (277)
                                                          ---------    ---------
      Net cash used in investing activities                 (4,256)        (277)
                                                          ---------    ---------

Cash flows from financing activities:
    Proceeds from loan payable                                  --          159
    Payments on loans payable                                   --          (74)
    Proceeds from issuance of common stock                      14           --
    Restricted funds from stock subscription for
      convertible preferred stock                               --        3,075
                                                          ---------    ---------

      Net cash provided by financing activities                 14        3,160
                                                          ---------    ---------

Decrease in cash and cash equivalents                       (5,775)        (140)

Cash and cash equivalents at beginning of period            21,267           --
                                                          ---------    ---------

Cash and cash equivalents at end of period                $ 15,492     $     --
                                                          =========    ---------
</TABLE>




         See Notes to Condensed Consolidated Financial Statements.








                                       3

<PAGE>

                            TVIA, INC. AND SUBSIDIARY

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three months ended June 30, 2001, are not necessarily indicative of the results
that may be expected for the fiscal year ended March 31, 2002. The accompanying
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of Tvia, Inc. and
subsidiary ("the Company") for the fiscal year ended March 31, 2001, which are
included in the Company's Annual Report on Form 10K filed with the Securities
and Exchange Commission on June 29, 2001.

     The balance sheet at March 31, 2001 has been derived from the audited
consolidated financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.


NOTE 2 - SUMMARY OF SIGNIFICANT POLICIES

Consolidation

     The consolidated financial statements herein presented include the results
and financial position of Tvia and its wholly-owned subsidiary in China. The
functional currency of the Chinese subsidiary is the U.S. dollar; accordingly,
all gains and losses arising from foreign currency transactions in currencies
other than the U.S. dollar are included in the consolidated statements of
operations. All intercompany transactions and balances have been eliminated in
consolidation.

Cash and Cash Equivalents and Short-Term Investments

     The Company considers all highly liquid investment securities with original
maturities of three months or less from the date of purchase to be cash and cash
equivalents. Management determines the appropriate classification of short-term
investments at the time of purchase and evaluates such designations as of each
balance sheet date. To date, all short-term investments have been classified as
available-for-sale and are carried at fair value with unrealized gains and
losses, if any, included as a component of accumulated comprehensive income in
stockholders' equity, net of any related tax effects. Interest, dividends and
realized gains and losses are included in interest income in the consolidated
statements of operations. The value of the Company's investments by major
security type is as follows:

<TABLE>
<CAPTION>
                                                                  As of June 30, 2001 (in thousands)
                                                   ---------------------------------------------------------------
                                                                    Aggregated
                                                   Amortized           Fair            Unrealized       Unrealized
                                                      Cost             Value              Gain             Loss
                                                      ----             -----              ----             ----
         <S>                                       <C>              <C>                <C>              <C>
         U.S. government and agency securities      $ 3,797           $ 3,803             $  6             $ --

         U.S. corporate and bank debt                23,956            24,073              122               (5)
                                                    -------           -------             ----             ----
                                                    $27,753           $27,876             $128             $ (5)
                                                    =======           =======             ====             ====
</TABLE>

                                       4

<PAGE>

Revenue Recognition

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements."
SAB 101 includes requirements for when shipments may be recorded as revenue when
the terms of the sale include customer acceptance provisions or an obligation of
the seller to install the product. In such instances, SAB 101 generally requires
that revenue recognition occur at completion of installation and/or upon
customer acceptance. The Company has reviewed its revenue recognition policies
and determined that they are in compliance with SAB 101. Accordingly, there was
no impact on the Company's financial statements from adopting SAB 101 in fiscal
2001.

     Revenue consists primarily of sales of products to original equipment
manufacturers ("OEMs") and distributors. Revenues from sales to OEMs are
recognized upon shipment. The Company has agreements with certain distributors
which do not contain rights of return and price protection rights. However, a
limited number of distributor agreements do contain rights to return slow moving
inventory or discontinued products held in inventory by the distributor which
has not sold through to an end user. The Company defers revenue recognition
relating to sales to all distributors until such products are sold through to
the end customer by the distributor, or if sell through information is not
available from the distributor, when cash is received from the distributor.
Receipts of cash from those distributors which do not provide sell through
information have historically been indicative of sell through to an end user by
that distributor. Management is currently not aware of any circumstances that
would require the return of cash to a distributor, once payment from a
distributor has been received.

     The Company also sells software development kits and application modules to
OEMs. The Company recognizes sales of software development kits and application
modules in accordance with the American Institute of Certified Public
Accountants Statement of Position 97-2 "Software Revenue Recognition" ("SOP
97-2"), as amended. Under SOP 97-2, software revenues are recognized when an
agreement has been executed or a definite purchase order has been received and
the product has been delivered, no significant obligations with regard to
implementation remain, the fee is fixed and determinable and collection is
probable. For each of the three months ended June 30, 2001 and 2000, revenues
from the sale of software development kits and application modules were less
than 10% of net revenues.


Concentration of Credit Risk

     Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of bank deposits and accounts
receivable. The Company places its cash and cash equivalents in checking and
money market accounts in financial institutions and in short-term investment
securities. The Company's accounts receivable are derived primarily from sales
to OEMs and distributors. The Company performs ongoing credit evaluations of its
customers and maintains an allowance for potential doubtful accounts.

                                       5

<PAGE>

Comprehensive Loss

          Comprehensive loss includes unrealized investment gains (losses) that
have been previously excluded from net loss and reflected instead as a component
of accumulated comprehensive loss in stockholders' equity. A summary of
comprehensive loss is as follows (in thousands):

                                                    THREE MONTHS ENDED
                                                          JUNE 30,

                                                    ------------------
                                                    2001       2000
                                                    ----       ----

Net loss                                            $(4,948)   $(1,479)
Unrealized loss on available-for-sale investments       (25)        --
                                                    -------    -------
Comprehensive loss                                  $(4,973)   $(1,479)
                                                    =======    =======



Recent Accounting Pronouncements

         In June 1999, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative Financial
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," which amends SFAS No. 133 to be effective for all fiscal
years beginning after June 15, 2000. In June 2000, SFAS No. 133 was amended by
SFAS No.138, "Accounting for Certain Derivative Financial Instruments and
Certain Hedging Activities", which amended or modified certain issues discussed
in SFAS No. 133. SFAS No. 138 is also effective for all fiscal years beginning
after June 15, 2000. SFAS No. 133 and SFAS No. 138 establish accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either as an asset or a liability measured at its fair
value. The statements also require that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. The Company does not expect the adoption of SFAS No. 133 and SFAS No.
138 to have a material impact on its financial statements.

         In July 2001, the Financial Accounting Standard Board ("FASB") issued
SFAS No.'s 141 and 142, "Business Combinations" and "Goodwill and Other
Intangibles". FASB 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. Under FASB 142, goodwill
is no longer subject to amortization over its estimated useful life. Rather,
goodwill is subject to at least an annual assessment for impairment, applying a
fair-value based test. Additionally, an acquired intangible asset should be
separately recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged, regardless of the acquirer's intend
to do so. Other intangible assets will continue to be valued and amortized over
their estimated lives; in-process research and development will continue to be
written off immediately. The Company does not expect that the implementation of
these guidelines will have a material impact on its financial position or
results of operations.


NOTE 3 - INVENTORIES

     Inventories are stated at the lower of cost (first-in, first-out) or market
value and include materials, labor and overhead. The Company periodically
evaluates the quantities on hand relative to current and historical selling
prices and historical and projected sales volume. Based on these evaluations,
provisions are made to reduce excess inventories down to their net realizable
value. It is possible that estimates of net realizable value can change in the
near term. Inventories consist of the following (in thousands):

                                               June 30,           March 31,
                                                 2001                2001
                                                 ----                ----

Raw material                                   $1,522              $2,598
Work-in-process                                   177                 243
Finished goods                                    411               1,502
                                               ------              ------
                                               $2,110              $4,343
                                               ======              ======



NOTE 4 - NET LOSS PER SHARE

     Net loss per share has been calculated in accordance with the Financial
Accounting Standards Board Statement No. 128, "Earnings per Share" ("SFAS 128").
Basic net loss per share is computed using the weighted average number of shares
of common stock outstanding. Diluted loss per share information is the same as
basic net loss per share since common shares issuable upon conversion of
redeemable convertible preferred stock, convertible preferred stock, stock
options and warrants are antidilutive.

                                       6

<PAGE>

         The following table sets forth the computation of basic and diluted net
loss per share (in thousands except per share amounts):

                                                        THREE MONTHS ENDED
                                                             JUNE 30,

                                                       --------------------
                                                         2001        2000
                                                         ----        ----

Historical:
Net loss attributable to common stockholders           $ (4,948)   $ (2,150)

Basic and diluted:
    Weighted average shares of common stock              21,839       5,233
         outstanding

    Less:  Weighted average shares of common stock         (346)        (81)
                                                       --------    --------
         subject to repurchase

Weighted average shares used in computing basic and
          diluted net loss per share                     21,493       5,152
                                                       ========    ========

Basic and diluted net loss per share attributable to   $  (0.23)   $  (0.42)
                                                       ========    ========
          common stockholders



NOTE 5 - INCOME TAXES

     The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS
109"). Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recorded or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

     As a result of the Company's continued losses, there was no provision for
income taxes for the three months ended June 30, 2001 and 2000.

NOTE 6 - SIGNIFICANT CUSTOMERS

     Revenues to significant distributors and customers, those representing
approximately 10% or more of total revenues for the respective periods, are
summarized as follows:

                                 THREE MONTHS ENDED
                                      JUNE 30,

                               ----------------------
                                 2001          2000
                                 ----          ----
Customer A...............         48%            *
Customer B...............         25%           29%
Customer C...............         12%            *
Customer D...............          *            18%
Customer E...............          *            12%

(* = less than 10%)

                                       7

<PAGE>

     The loss of one or more major distributors or customers could have a
material adverse effect on our business, financial condition and results of
operations.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

     The Company is subject to various claims which arise in the normal course
of business. In the opinion of management, the Company is unaware of any claims
which would have a material adverse effect on the financial position, liquidity
or results of operations of the Company.


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited condensed
financial statements and notes thereto set forth in Item 1 of this report. The
statements contained in this report that are not purely historical are
forward-looking statements, including statements regarding our expectations,
beliefs, intentions, or strategies regarding the future. When used in this
discussion, the words "expects", "anticipates", "estimates" and similar
expressions are intended to identify forward-looking statements. These
statements relate to future periods and include statements as to expected
revenues, operating expenses, net loss, gross profit and loss; reasons for
decreased revenues and the slowdown of the interactive television industry;
expansion of our research and development functions and expenditures in both the
United States and the People's Republic of China; the effect of certain
accounting principles; uses and sufficiency or our available cash, cash
equivalents and short-term investments; reliance on original equipment
manufacturers; effect of changes in foreign currency exchange rates; growth in
operations; the ability to commercialize new technologies; the performance and
utility of products and services; ability to compete and competitors; and
anticipated uses of funds, are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, those risks discussed below, as
well as risks relating to as slower than anticipated emergence of the
interactive television market; general economic conditions and specific
conditions in the markets we address; dependence on a key customer; the loss of
a key customer; our ability to specify, develop or acquire, complete, introduce,
market and transition to volume production new products and technologies in a
timely manner; the volume of our product sales and pricing concessions on volume
sales; the qualification, availability and pricing of competing products and
technologies and the resulting effects on sales and pricing of our products;
fluctuations in the manufacturing yields of our third party semiconductor
foundries and other problems or delays in the fabrication, assembly, testing or
delivery of our products; changes in our products or customer mix; the risk that
excess inventory may result in write-offs, price erosion and decreased demand;
the level of orders received that can be shipped in a fiscal quarter; the impact
of foreign currency exchange rates; and the matters discussed in "Factors that
May Affect Results." These forward-looking statements speak only as of the date
hereof. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any statement is
based.


Overview

     We design, develop and market semiconductors for the Internet appliance,
broadband set-top box and digital television markets. Our semiconductor
solutions process rich media content streams available from the Internet and
from television and enable consumers to have a customized and interactive
television viewing experience.

     We currently have two product families: the CyberPro 5000 family,
introduced in calendar year 1998; and the CyberPro 5300 family, introduced in
calendar year 1999. These product families currently generate most of our
revenues. We sell our products through three channels. First, we sell our
products directly to original equipment manufacturers, or OEMs, and recognize
revenues at the time of shipment to these OEMs. Second, we sell our products
through sales representatives who receive a commission. Finally, we sell our
products to a number of distributors who have contractual rights to earn a
negotiated margin on the sale of our products. We defer

                                       8

<PAGE>

recognition of revenues for sales to our distributors until payment is received
or until they have sold our products to end-users. We also generate revenues
from licensing software which we believe will continue to constitute a small
percentage of total revenues in the future.

     Approximately 43% and 76% of our total revenues for the three months ended
June 30, 2001 and 2000, respectively, were derived from customers located
outside the United States. All of our revenues to date have been denominated in
United States dollars. Historically, a relatively small number of customers and
distributors have accounted for a significant portion of our product sales. Our
top three customers, including distributors, accounted for 85% and 59% of total
revenues in the three months ended June 30, 2001 and 2000, respectively.

     Various factors have affected and may continue to affect our gross margin.
These factors include, but are not limited to, our product mix, the position of
our products in their respective life cycles, yields and the mix of our product
sales and development contracts and other revenues. For example, newly
introduced products generally have higher average selling prices and generate
higher gross margins. Both average selling prices and the related gross margins
typically decline over product life cycles due to competitive pressures and
volume price agreements. Our gross margin and operating results in the future
may continue to fluctuate as a result of these and other factors.

     The sales cycle for the test and evaluation of our products can range from
three months to nine months or more, with an additional three to nine months or
more before an OEM customer commences volume production of equipment
incorporating our products, if ever. Due to these lengthy sales cycles, we may
experience a delay between incurring operating expenses and inventory costs and
the generation of revenues from design wins.

     We have sustained losses on a quarterly and annual basis since inception.
As of June 30, 2001, we had an accumulated deficit of approximately $40.9
million. These losses resulted from significant costs incurred in the planning
and development of our technology and services and from significant marketing
costs. We expect to experience significant increases in our operating expenses,
particularly in research and development, as we design and market new
technologies.

     We anticipate lower revenues for at least the next quarter as compared to
the same period in the prior fiscal year. We believe that this is due to a
slowdown in the interactive television industry caused by a slower than
anticipated emergence of the interactive television market, a general industry
inventory correction, delay in customer product introductions in order to
incorporate additional third party features, and general economic uncertainty.
Due to anticipated lower revenues and continued increased spending on research
and development, we anticipate that we will continue to incur net losses at
least at the level incurred in the quarter ended June 30, 2001 for at least the
next three quarters.

     We have a subsidiary in the People's Republic of China which performs
research and development, and a branch office in Taiwan which is primarily
engaged in sales efforts.

                                       9

<PAGE>

Results of Operations

         The following table sets forth, for the periods indicated, certain
financial data as a percentage of revenue:

                                                        THREE MONTHS ENDED
                                                             JUNE 30,
                                                   ---------------------------
                                                     2001               2000
                                                     ----               ----


Revenues                                             100.0%            100.0%
Cost of revenues                                     146.6              53.1
                                                    ------             -----
Gross profit                                         (46.6)             46.9
Operating expenses:
Research and development                             107.9              35.5
Sales, general and administrative                     53.6              28.0
Amortization of deferred stock compensation           16.0              18.0
                                                    ------             -----
Total operating expenses                             177.5              81.5
                                                    ------             -----
Operating loss                                      (224.1)            (34.6)
Interest income                                       23.2               1.9
Interest expense                                        --              (2.2)
Amortization of debt guarantee costs and other          --             ( 7.0)
                                                    ------             -----
Other income (expense), net                           23.2              (7.3)
                                                    ------             -----
Net loss                                            (200.9)            (41.9)
                                                    ------             -----


         Revenues. Revenues decreased to $2.5 million in the three months ended
June 30, 2001 compared to $3.5 million in the three months ended June 30, 2000.
The decrease was primarily due to a slower than anticipated emergence of the
interactive television market and to weak general economic conditions. Revenues
from three customers, Prediwave Corporation, Weikeng Industrial, Ltd., a
distributor, and General Instruments, Inc., accounted for 48%, 25% and 12%,
respectively, of total revenues for the three months ended June 30, 2001. We
anticipate that Prediwave Corporation and General Instruments, Inc. will be
significant customers in the three months ended September 30, 2001.

     Gross margin. Cost of goods sold in the quarter ended June 30, 2001
included an inventory charge of $2.1 million related to slow moving inventory
impacted by the reduced revenue levels in the interactive television market and
in-transition inventory items within the 5000 product family. Excluding this
charge, gross margin decreased to 39.0% in the three months ended June 30, 2001
compared to 46.9% in the same period ended June 30, 2000. This decrease resulted
primarily from unabsorbed overhead and lower production yield issues on one of
our product families. Many factors affect our profit margin, including, but not
limited to, our product mix, the position of our products in their respective
life cycles, yields and the mix of our product sales and development contracts
and other revenues.

         Research and development. Research and development expenses include
personnel and other costs associated with the development of product designs,
process technology, software and programming hardware. Our research and
development expenses reflect our continuing efforts to develop and bring to
market innovative and cost effective semiconductors that process the rich media
content available on the Internet and the broadband network. Research and
development expenses increased to $2.7 million in the three months ended June
30, 2001 from $1.3 million in the three months ended June 30, 2000. The increase
in absolute dollars was primarily attributable to an increase in the number of
research and development personnel as compared to the same period in fiscal
2001, higher levels of depreciation resulting from the acquisition of computers,
lab equipment and software, and the expansion of our research and development
operation in the People's Republic of China. Our research and development
activities in the People's Republic of China provide software and application
specific integrated circuit development support to our domestic operations. We
employed 178 engineers and supporting staff in the People's Republic of China at
June 30, 2001, and we expect to significantly expand our headcount at this
design center in the second quarter of fiscal 2002. Research and development
expenses as a percentage of total revenues were 107.9% in the first three months
of fiscal 2002 compared to 35.5% in the same period of fiscal 2001. The increase
in research and

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<PAGE>

development expenses as a percentage of revenues in the first three months ended
June 30, 2001 compared to the same period of fiscal 2001 is attributable to the
decrease in revenues between periods. In the foreseeable future, we expect
absolute research and development expenses to increase as we continue to expand
our research and development efforts.

         Sales, general and administrative. Sales, general and administrative
expenses consist primarily of personnel and other costs associated with the
management of our business and with the sale and marketing of our products.
Sales, general and administrative expenses increased to $1.3 million in the
three months ended June 30, 2001 from $988,000 in the three months ended June
30, 2000. The increase is primarily due to increased headcount, including hiring
executive officers, the expansion of our domestic and international sales force,
the building of our general and administrative infrastructure, and costs
associated to being a public company. Sales, general and administrative expenses
as a percentage of total revenues was 53.6% in the first three months of fiscal
year 2002 compared to 28.0% in the same period of fiscal year 2001. The increase
in sales, general and administrative expenses as a percentage of revenues in the
three months ended June 30, 2001 compared to the same period of fiscal 2001 is
attributable to the decrease in revenues between periods.

         Amortization of deferred stock compensation. We grant stock options to
hire, motivate and retain employees. We incurred stock compensation expense of
$393,000 and $657,000 in the three months ended June 30, 2001 and 2000,
respectively.

         Other income (expense), net. Other income (expense), net consists
primarily of interest income, interest expense and amortization of guarantee
debt costs. Other income, net was $572,000 for the three months ended June 30,
2001, compared to other expense, net of $257,000 for the three months ended June
30, 2000. Other income, net generated in the three months ended June 30, 2001,
was primarily a result of interest earned from our investments which increased
significantly in fiscal 2001 as a result of our initial public offering in
August 2000, and to a lesser extent, the repayment of our outstanding debt,
partially offset by amortization of guarantee debt. Other expense, net, in the
three months ended June 30, 2000 consisted mostly of the amortization of
deferred compensation related to warrants and options issued to guarantors of
our debt, and interest expense on this debt.

         Provision for income taxes. We are taxed in our jurisdictions of
operations based on the extent of taxable income generated in each jurisdiction.
For income tax purposes, revenues are attributed to the taxable jurisdiction
where the sales transactions generating the revenues were initiated. We incurred
operating losses in the three months ended June 30, 2001 and 2000, and therefore
made no provision for income tax in these periods.

         Preferred stock dividend. During the three months ended June 30, 2000,
we recorded a preferred stock dividend of $671,000 representing the value of the
beneficial conversion feature on the issuance of convertible preferred stock in
April 2000. The beneficial conversion was calculated based on the difference
between the conversion price of $7.50 per share and the estimated fair value of
the common stock at that date.

Liquidity and Capital Resources

         During the three months ended June 30, 2001, we used $1.5 million of
cash and cash equivalents in our operating activities as compared to $3.0
million during the three months ended June 30, 2000. The improvement in cash
usage was mainly due to a significant decrease in receivables during the three
months ended June 30, 2001 as compared to the three months ended June 30, 2000.

         Technology acquisitions and capital equipment purchases in the three
months ended June 30, 2001 totaled $1.0 million and $753,000, respectively,
compared to none and $277,000 in the three months ended June 30, 2000,
respectively.

         At June 30, 2001, our principal source of liquidity consisted of cash
and cash equivalents and short-term investments totaling $43.4 million. Working
capital at June 30, 2001 was $44.2 million.

         Based on our current expectations, we believe that our cash and cash
equivalents and short-term investment balances will be sufficient to meet our
working capital and capital requirements through the next twelve months. As a
result of anticipated net losses and purchases of capitalized assets, we
anticipate that we will utilize a significant

                                       11

<PAGE>

amount of our available cash and cash equivalents and short-term investments by
June 30, 2002. We may also utilize cash to acquire or invest in complementary
businesses or to obtain the use of complementary technologies.

Inflation

         The impact of inflation on our business has not been material for the
periods ended June 30, 2001 and 2000.

Recent Accounting Pronouncements

         In June 1999, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative Financial
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," which amends SFAS No. 133 to be effective for all fiscal
years beginning after June 15, 2000. In June 2000, SFAS No. 133 was amended by
SFAS No.138, "Accounting for Certain Derivative Financial Instruments and
Certain Hedging Activities", which amended or modified certain issues discussed
in SFAS No. 133. SFAS No. 138 is also effective for all fiscal years beginning
after June 15, 2000. SFAS No. 133 and SFAS No. 138 establish accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either as an asset or a liability measured at its fair
value. The statements also require that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. The Company does not expect the adoption of SFAS No. 133 and SFAS No.
138 to have a material impact on its financial statements.

         In July 2001, the Financial Accounting Standard Board ("FASB") issued
SFAS No.'s 141 and 142, "Business Combinations" and "Goodwill and Other
Intangibles". FASB 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. Under FASB 142, goodwill
is no longer subject to amortization over its estimated useful life. Rather,
goodwill is subject to at least an annual assessment for impairment, applying a
fair-value based test. Additionally, an acquired intangible asset should be
separately recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged, regardless of the acquirer's intend
to do so. Other intangible assets will continue to be valued and amortized over
their estimated lives; in-process research and development will continue to be
written off immediately. The Company does not expect that the implementation of
these guidelines will have a material impact on its financial position or
results of operations.

Factors that May Affect Future Results

We expect continuing losses and may not achieve profitability which could affect
our ability to expand our business.

         We have incurred significant operating losses in each year since our
inception and expect to continue to incur net losses for the foreseeable future,
primarily as a result of increases in expenses for research and development. Our
losses increased as we transitioned our focus away from the personal computer
market toward the Internet appliance, broadband set-top box and digital
television markets in 1996. We have incurred net losses of approximately $40.9
million from our inception in March 1993 through June 30, 2001. If we continue
to incur net losses, we may not be able to expand our business as quickly as we
would like. We do not know when or if we will become profitable and if we do
become profitable, we may not be able to sustain or increase our profitability.

Our operating expenses will increase as we build our business and these
increased expenses may impact our ability to become profitable.

         We have made substantial expenditures on research and development and
organizational infrastructure consisting of an executive team, finance, sales,
marketing and management information systems departments and our design center
located in the People's Republic of China. For the fiscal years ended March 31,
2001, 2000, 1999 and for the three months ended June 30, 2001, research and
development expenses represented 50.4%, 48.0%, 220.6% and 107.9% of our
revenues, respectively. We expect to continue to spend substantial financial and
other resources on developing and introducing new products and services, and on
expanding our research and development. We expect that our operating expenses
will continue to increase in absolute dollars and may increase

                                       12

<PAGE>

as a percentage of revenues. If our revenues do not increase, our business and
results of operations could suffer. We base our expense levels in part on our
expectations regarding future revenues. If our revenues for a particular quarter
are lower than we expect, we may be unable to proportionately reduce our
operating expenses for that quarter.

Because the emergence of the interactive television market has been slower than
anticipated, we may not be able to sell our products or sustain our business.

         Our semiconductor solutions are incorporated into products that allow
interactive television. The concept of interactive television and the market for
products that facilitate it are new and developing. As a result, our profit
potential is unproven and may never materialize. Broad acceptance of Internet
appliances, broadband set-top boxes and digital televisions will depend on the
extent to which consumers use devices other than personal computers to access
the Internet. To date, the market for these products has not developed as
quickly as our customers and we had previously anticipated. Consequently,
certain of our customers have significant inventory of our semiconductors or
products that incorporate our semiconductors, thereby limiting the opportunity
to sell additional semiconductors to these customers until their present
inventories are depleted. Our success will also depend on the ability of OEMs
and service providers that work with our OEMs to create demand for and market
the products incorporating our semiconductors. Unless a sufficiently large
market for Internet appliances, broadband set-top boxes, digital televisions and
other products that are used for interactive television develops, demand for
products incorporating our semiconductor solutions may not be sufficient to
sustain our business.

A significant amount of our revenues comes from a few OEMs and any decrease in
revenues from these few customers could significantly impact our financial
results.

         Historically we have been, and we expect to continue to be, dependent
on a relatively small number of OEMs for a significant portion of our total
revenues. Most sales to these customers are through distributors. Sales to
Prediwave Corporation and General Instruments, Inc., OEMs, and Weikeng
Industrial Co., Ltd., a distributor, accounted for approximately 48%, 12% and
25% of our total revenues for the three months ended June 30, 2001,
respectively. In the three months ended June 30, 2000, Weikeng Industrial Co.,
Ltd., a distributor, Click TV, Inc., and Samsung Electronics America, Inc.,
OEMs, accounted for 29%, 18% and 12% of total revenues, respectively. We may not
be able to retain our largest customers or to obtain additional key accounts.
Any reduction or delay in sales of our products to one or more of our key
customers or our inability to successfully develop relationships with additional
key customers could have a material adverse effect on our business.

Customers may cancel or defer significant purchase orders, or our distributors
may return our products, which would cause our inventory levels to increase and
our revenues to decline.

         We sell our products on a purchase order basis through our direct sales
channel, sales representatives and distributors, and our customers may cancel or
defer purchase orders at any time with little or no penalty. We recognize
revenues from sales to our distributors when they have sold our products to
their customers. We recognize revenues on sales to our OEM customers when we
ship our products to the OEM. We generally permit our distributors to return
products to us. If our customers cancel or defer significant purchase orders or
our distributors return our products, our inventories would increase and our
revenues would decrease, which would materially harm our business as increases
in inventory reserves could be required. Refusal of OEM customers to accept
shipped products or delays or difficulties in collecting accounts receivable
could have an adverse effect on our business.

Because of our long product development process and sales cycle, we incur
substantial expenses before we generate revenues and may not recover our
expenditures.

         To develop market acceptance of our products, we must dedicate
significant resources to research and development, production and sales and
marketing. We develop products based on forecasts of demand and we incur
substantial product development expenditures prior to generating associated
revenues. Our customers typically perform numerous tests and extensively
evaluate our products before incorporating them into their systems. The time
required for testing, evaluating and designing our products into a customer's
equipment can take up to nine months or more, with an additional three to nine
months or more before an OEM customer commences volume production of equipment
incorporating our products, if ever. Because of this lengthy development cycle,
we may

                                       13

<PAGE>

experience a delay between the time we accrue expenses for research and
development and sales and marketing efforts and the time when we generate
revenues, if any.

         Furthermore, achieving a design win with a customer does not
necessarily mean that this customer will order large volumes of our products. A
design win is not a binding commitment by a customer to purchase our products.
Rather, it is a decision by a customer to use our products in the design
process. In addition, our customers can choose at any time to discontinue using
our products in that customer's designs or product development efforts. If our
products are chosen to be incorporated into a customer's products, we may still
not realize significant revenues from that customer if that customer's products
are not commercially successful. As a result, our profitability from quarter to
quarter and from year to year may be materially affected by the number and
timing of our new product introductions in any period and the level of
acceptance gained by these products.

If we fail to successfully develop, introduce and sell new products, we may be
unable to effectively compete in the future.

         We operate in a highly competitive, quickly changing environment marked
by new and emerging products and technologies. Our success depends on our
ability to develop, introduce and successfully market new products and enhance
our existing products in the Internet appliance, broadband set-top box and
digital television markets. The development of these new products is highly
complex and, from time to time, we have experienced delays in completing their
development and introduction. Any one of the following factors could affect our
ability to develop, introduce and sell new products and could materially harm
our business:

         . our failure to complete new product designs in a timely manner;

         . our inability to manufacture our new products according to design
           specifications;

         . our inability to deliver our products to our customers in a timely
           manner for any reason, including a lack of manufacturing capacity or
           the failure of our contracted foundries to meet targeted
           manufacturing yields; and

         . our sales force's and independent distributors' inability to create
           adequate demand for our products.

Our future operating results are likely to fluctuate and may fail to meet
expectations which could cause our stock price to decline.

         Our operating results have varied in the past and are likely to do so
in the future as we attempt to meet consumer demand in the emerging markets for
Internet appliances, broadband set-top boxes and digital televisions. Our future
operating results will depend on many factors and may fail to meet our
expectations for a number of reasons. Any failure to meet these expectations or
those of securities analysts and investors could cause our stock price to
fluctuate or decline significantly. A number of factors, including those listed
below, may cause fluctuations in our operating results and stock price:

         . the general condition in the semiconductor industry market;

         . fluctuations in the volume of product sales, changes in product mix
           and pricing concessions on sales;

         . the timing, rescheduling or cancellation of significant customer
           orders;

         . the timing of investments in, and the results of, research and
           development;

         . changes in industry standards;

         . introduction of interactive television services by service providers;

         . availability of manufacturing capacity and raw materials;

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<PAGE>



         .  product introductions and price changes by our competitors;

         .  our ability to specify, develop, introduce and market new products
            with smaller geometries, more features and higher levels of design
            integration in accordance with design requirements and design
            cycles; and

         .  the level of orders received that can be shipped in a given period;

         .  changes in earning estimates or investment recommendations by
            analysts; and

         .  changes in investors perceptions.

Our industry is highly competitive, and we cannot assure you that we will be
able to effectively compete.

         The market for Internet appliances, broadband set-top boxes and digital
televisions in particular, and the semiconductor industry in general, are highly
competitive. We compete with a number of domestic and international suppliers of
semiconductors in our targeted markets. We expect competition to intensify as
current competitors expand their product offerings and new competitors enter our
targeted markets. We believe that we must compete on the basis of a variety of
factors, including:

         .  functionality;

         .  performance;

         .  time to market;

         .  price;

         .  conformity to industry standards;

         .  product road maps; and

         .  technical support.

         We currently compete with ATI Technologies, Inc., Broadcom Corporation,
and TeraLogic, Inc. In addition to these competitors, we expect other major
semiconductor manufacturers will enter our targeted markets as the Internet
appliance, broadband set-top box and digital television markets become more
established. A number of companies, including International Business Machines
Corporation, STMicroelectronics N.V., National Semiconductor Corporation,
Equator Technologies, Inc. and TeleCruz Technology, Inc., have announced that
they are developing or plan to introduce competing products in the Internet
appliance, broadband set-top box and digital television markets which could
result in significant competition.

         Some of our current and potential competitors operate their own
fabrication facilities or have a longer operating history and significantly
greater financial, sales and marketing resources. They may also have preexisting
relationships with our customers or potential customers. As a result, these
competitors may be able to adapt more quickly to new or emerging products,
develop new technologies, or address changes in customer requirements or devote
greater resources to the development and promotion of strategic relationships
among themselves or with existing or potential customers. It is possible that
new competitors or alliances among competitors could emerge and rapidly acquire
significant market share. Increased competition could harm our business, results
of operations and financial condition by, for example, increasing pressure on
our profit margin or causing us to lose sales opportunities.


                                       15

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We depend on two independent foundries to manufacture our products based on our
forecasts, which could result in an oversupply or undersupply of products.

     We do not own or operate our own fabrication facility. We currently depend
upon two outside foundries, Taiwan Semiconductor Manufacturing Corporation, or
TSMC, and United Manufacturing Corporation, or UMC. We do not have long term
supply agreements with these foundries to manufacture our semiconductor
products. Both of these foundries are located in Taiwan and each has limited
manufacturing capacity.

     The foundries require us to provide forecasts of our anticipated
manufacturing orders in advance of receiving purchase orders from our customers.
This may result in product shortages or excess product inventory. Obtaining
additional supply in the face of product shortages may be costly or not
possible, especially in the short term. Our failure to adequately forecast
demand for our products would materially harm our business. The foundries may
allocate capacity to the production of other companies' products while reducing
delivery to us on short notice.

If we have to qualify new independent foundries for any of our products and do
not have sufficient supply of our products on hand, we may lose revenues and
damage our customer relationships.

     Processes used to manufacture our products are complex, customized to our
specifications and can only be performed by a limited number of manufacturing
facilities. The foundries we use have from time to time experienced lower than
anticipated manufacturing yields, particularly in connection with the
introduction of new products and the installation and start up of new process
technologies. In addition, the foundries we use are located in a seismically
active area, and earthquakes have caused these foundries to close for repairs,
resulting in a delay in manufacturing our products.

     Although we primarily utilize two independent foundries, most of our
components are not manufactured at both foundries at any given time. The
inability of one of the foundries to provide components could result in
significant delays and harm our business. In the event either foundry
experienced manufacturing or financial difficulties or suffered any damage or
destruction to its facilities, or in the event of any other disruption of
foundry capacity, we may not be able to qualify alternative manufacturing
sources for existing or new products in a timely manner. For example, in
September 1999, Taiwan experienced a major earthquake. The earthquake and its
resulting aftershocks caused power outages and significant damage to Taiwan's
infrastructure. In addition, as a result of the rapid growth of the
semiconductor industry based in the industrial park where both foundries are
located, severe constraints have been placed on the water and electricity supply
in that region. Any shortages of water or electricity or a natural disaster
could adversely affect these foundries' ability to supply our products, which
could have a material adverse effect on our operating results.

     Even our current outside foundries would need to have manufacturing
processes qualified in the event of a disruption at the other foundry, which we
may not be able to accomplish in a timely manner sufficient to prevent an
interruption in the supply of the affected products. We cannot assure you that
any existing or new foundries would be able to produce integrated circuits with
acceptable manufacturing yields in the future, or will continue to have
sufficient capacity to meet our needs. If our manufacturing requirements are not
satisfied, our business would be materially harmed.

We may encounter periods of semiconductor oversupply, resulting in pricing
pressure, as well as undersupply, resulting in a risk that we could be unable to
fulfill our customers' requirements.

     The semiconductor industry has historically been characterized by wide
fluctuations in the demand for, and supply of, its products. These fluctuations
have resulted in circumstances when supply and demand for the industry's
products have been widely out of balance. Our operating results may be
materially harmed by industry wide semiconductor oversupply, which could result
in severe pricing pressure. On the other hand, in a market with undersupply, we
would have to compete with larger companies for limited manufacturing capacity.
If material shortages occur, we may incur additional costs to procure the scarce
components or be unable to have our products manufactured in a timely manner or
in quantities necessary to meet our requirements. Since we outsource all of our
manufacturing, we are particularly vulnerable to supply shortages. As a result,
we may be unable to fill orders and may lose customers. Any future industry wide
oversupply or undersupply of semiconductors would materially harm our business
and have a negative impact on our earnings.

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<PAGE>

Our semiconductors are complex to manufacture and may have errors or defects
which could be costly to correct.

     The manufacture of semiconductors is a complex process. Foundries may not
achieve acceptable product yields from time to time due to the complexity of the
integrated circuit design, inadequate manufacturing processes and other reasons.
We refer to the proportion of final acceptable integrated circuits that have
been processed, assembled and tested relative to the gross number of integrated
circuits that could have been produced from the raw materials as our product
yields. Identifying defects and determining the reason for low yields may be
discovered after production has begun and at various stages of the production
cycle. Our failure to discover defects early in the production cycle will result
in higher costs and may require a diversion of our technical personnel and
resources away from product development in order to correct the defect. In
addition, defective products that have been released into the market and
distributed to our customers and end users may result in harm to our reputation,
significant warranty costs, diversion of our technical and managerial resources
and potential product liability claims that would be costly to defend.

Our software is complex and may have bugs or defects which could be costly to
correct.

     Our products depend on complex software that we develop internally and
license from others. Complex software often contains defects, particularly when
first introduced or when new versions are released. Determining whether our
software has defects may occur after our products are released into the market
and distributed to our customers and end users, and may result in harm to our
reputation, significant warranty costs, diversion of our technical resources and
potential product liability claims that would be costly to defend and divert
managerial resources.

We face foreign business, political and economic risks because a majority of our
sales are to customers outside of the United States.

     Sales of our products to our OEM customers and to distributors located
outside the United States accounted for 67%, 71%, 81% and 43% of our total
revenues in fiscal years 2001, 2000, 1999 and for the three months ended June
30, 2001, respectively. We anticipate that sales to customers located outside
the United States will continue to represent a significant portion of our total
sales in future periods. In addition, many of our domestic customers sell their
products outside of North America, thereby indirectly exposing us to risks
associated with foreign commerce. Asian economic instability impacts the sales
of products manufactured by our customers, as does the Chinese New Year, during
which time many manufacturers and businesses close their operations. We could
also experience greater difficulties collecting accounts receivable from
customers outside of the United States. Accordingly, our operations and revenues
are subject to a number of risks associated with foreign commerce.

     To date, we have denominated sales of our products in foreign countries
exclusively in United States dollars. As a result, any increase in the value of
the United States dollar relative to the local currency of a foreign country
will increase the price of our products in that country so that our products
become relatively more expensive to customers in the local currency of that
foreign country. As a result, sales of our products in that foreign country may
decline. To the extent any of these types of risks materialize, our business
would be materially harmed.

The rapid growth of our business and operations has strained and will continue
to strain our administrative, operational and financial resources, and our
failure to manage our future growth could affect our operations and our future
ability to expand.

     We are currently experiencing rapid growth and expansion in our business
and operations. For example, we are expanding our research and development
facilities in the People's Republic of China. Our growth has placed, and will
continue to place, a significant strain on our administrative, operational and
financial resources and increased demands on our systems and controls. To
accommodate our growth, we must implement a variety of new and upgraded
operational and financial systems, procedures and controls, including
improvement of our accounting and other internal management systems, all of
which are likely to require substantial managerial effort. We cannot assure you
that these efforts can be accomplished successfully. Our growth has resulted in
a continuing increase in the level of responsibility for both existing and new
management personnel, and will require that we recruit, hire and train a
substantial number of new personnel. Our failure to manage our growth could
prevent us from successfully achieving market acceptance for our products,
disrupt our operations, delay our expansion and harm our business.

                                       17

<PAGE>

We depend on key personnel, the loss of whom would impair or inhibit the growth
of our business.

     Our success depends on the skills, experience and performance of our
executive officers and other key management and technical personnel, many of
whom would be difficult to replace. We are particularly dependent on Kenny Liu,
our Chairman and Chief Executive Officer, and Jack Guedj, our President. The
competition for employees with these skills is intense, particularly in the San
Francisco Bay Area, and we may not be able to attract and retain a sufficient
number of such qualified new personnel in the future. The loss of the service of
one or more of our key employees, or our failure to attract, retain and motivate
qualified personnel would inhibit the growth of our business.

We rely on strategic relationships to commercialize our products, and these
relationships may require that we expend significant resources without
guarantees that our endeavors will be profitable.

     We rely on strategic relationships with some of our customers who we
believe are the market leaders in our target markets. These relationships often
involve the proposed development by us of new products involving significant
technological challenges. Since the proposed products under development may
offer potential competitive advantages to our customers, considerable pressure
is frequently placed on us to meet development schedules. While an essential
element of our strategy involves establishing such relationships, these projects
require substantial amounts of our limited resources, with no guarantee of
revenues to us, and could materially detract from or delay the completion of
other important development projects. Delays in development could impair the
relationship between us and our customers and negatively impact sales of the
products under development. Moreover, our customers may develop their own
solutions for products currently supplied by us, which could have an adverse
effect on our business.

We depend on third party subcontractors for assembly of our semiconductors which
reduces our control over the delivery, quantity, quality or cost of our
products.

     Substantially all of our products are assembled by one of two
subcontractors, both of which are located in Taiwan. Typically, we procure
services from these subcontractors on a purchase order basis. Their availability
to assemble our products could be adversely affected if either subcontractor
experiences financial difficulties or suffers any damage or destruction to its
facilities or any other disruption of its assembly capacity. Because we rely on
third party subcontractors for assembly of our products, we cannot directly
control product delivery schedules. We have experienced in the past, and may
experience in the future, product shortages or quality assurance problems that
could increase the cost of manufacturing or testing of our products. It is time
consuming and difficult to find and qualify alternative assemblers. If we are
forced to find substitute subcontractors, shipments of our products could be
delayed. Any problems associated with the delivery, quantity or cost of our
products could harm our business.

Political instability in the People's Republic of China or Taiwan could harm our
manufacturing and research and development capabilities and negatively impact
our product sales.

     We operate a facility and are in the process of expanding our research and
development operations in the People's Republic of China. In addition, almost
all of our products are manufactured and assembled outside of the United States
at facilities operated by third parties in Taiwan. The political and economic
conditions in the region, including the People's Republic of China's dispute
with Taiwan, may adversely impact our operations including manufacture and
assembly of our products and research and development efforts. We cannot assure
you that restrictive laws or policies on the part of either the People's
Republic of China or the United States will not constrain our ability to operate
in both countries. If we are required to relocate our facilities, our business
will be disrupted and our costs associated with research and development will
increase.

If our competitors use our intellectual property and proprietary rights, our
ability to compete would be impaired.

     Our success depends in part upon our rights in proprietary technology and
processes that we develop and license from, and to, others. We rely on a
combination of patent, copyright, trademark and trade secret laws, as well as
confidentiality agreements with our employees, consultants and strategic
partners in order to protect proprietary technologies that use our products. We
cannot assure you that these measures will provide meaningful protection for our
proprietary technologies and processes, and they do not prevent independent
third party development of


                                       18

<PAGE>

competitive products. In addition, it is difficult to monitor unauthorized use
of technology, particularly in foreign countries where laws may not protect our
proprietary rights as fully as in the United States.

     We currently have patent applications pending in the United States, and we
may seek additional patents in the future. Because the content of patent
applications in the United States is not publicly disclosed until the patent is
issued, applications may have been filed which relate to our products or
processes. We cannot assure you that our current patent applications or any
future patent applications will result in a patent being issued with the scope
of the claims we seek, if at all, or whether any patents we have or may receive
will be challenged or invalidated. The failure of any patents to provide
protection to our technology would make it easier for our competitors to offer
similar products.

We may face intellectual property infringement claims that could be costly and
could result in the loss of proprietary rights which are necessary to our
business.

     Other parties may assert patent infringement claims against us, including
claims against technology that we license from others, and our products or
processes may infringe issued patents of others. Litigation is common in the
semiconductor industry and any litigation could result in significant expense to
us. Litigation would also divert the efforts of our technical and management
personnel, whether or not the litigation is determined in our favor. Litigation
could also require us to develop non-infringing technology or enter into royalty
or license agreements. These royalty or license agreements may not be available
on acceptable terms, including limitations on representations and warranties
regarding infringement and indemnification in the event of infringement claims.
Our failure or inability to develop non-infringing technology, license the
proprietary rights on a timely basis or receive appropriate protection on
licensed technology would harm our business.

Regulation of our customers' products may slow the process of introducing new
products and could impair our ability to compete.

     The Federal Communications Commission, or the FCC, has broad jurisdiction
over our target markets. Various international entities or organizations may
also regulate aspects of our business or the business of our customers. Although
our products are not directly subject to regulation by any agency, the
transmission pipes, as well as much of the equipment into which our products are
incorporated, are subject to direct government regulation. For example, before
they can be sold in the United States, Internet appliances, broadband set-top
boxes and digital televisions must be tested and certified by Underwriters
Laboratories and meet FCC regulations. Accordingly, the effects of regulation on
our customers or the industries in which our customers operate may, in turn,
harm our business. FCC regulatory policies affecting the ability of cable
operators or telephone companies to offer certain services and other terms on
which these companies conduct their business may impede sales of our products.
In addition, our business may also be adversely affected by the imposition of
tariffs, duties and other import restrictions on systems of suppliers or by the
imposition of export restrictions on products that we sell internationally.
Changes in current laws or regulations or the imposition of new laws or
regulations in the United States or elsewhere could harm our business.

We may experience power blackouts and higher electricity prices as a result of
California's current energy crisis, which could disrupt our operations and
increase our expenses.

     California is in the midst of an energy crisis that could disrupt our
manufacturing operations and increase our expenses. We rely on the major
Northern California public utility, Pacific Gas & Electric Company, or PG&E, to
supply electric power to our facilities in Northern California. Due to problems
associated with the deregulation of the power industry in California and
shortages in wholesale electricity supplies, customers of PG&E have been faced
with increased electricity prices, power shortages and rolling blackouts.
Increased energy prices will increase our expenses which will increase our cost
of revenues and decrease our gross profits. If blackouts interrupt our power
supply, we may be temporarily unable to continue operations at our California
facilities. Any such interruption in our operations could delay our ability to
develop new products, or to do the final testing on our products. Also, such
disruptions could damage our reputation and result in lost revenue, either of
which could substantially harm our business and results of operations

                                       19

<PAGE>

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND INTEREST
RATE RISK

Quantitative and Qualitative Discussion of Market Interest Rate Risk

     Our cash equivalents and short term investments are exposed to financial
market risk due to fluctuation in interest rates, which may affect our interest
income and, in the future, the fair market value of our investments. We manage
the exposure to financial market risk by performing ongoing evaluations of our
investment portfolio and presently invest entirely in short term investment
grade government and corporate securities. These securities will be highly
liquid and generally mature within 12 months from the purchase date. Due to the
short maturities of our investments, the carrying value should approximate the
fair value. In addition, we do not use our investments for trading or other
speculative purposes. We have performed an analysis to assess the potential
effect of reasonably possible near term changes in interest and foreign currency
exchange rates. The effect of any change in foreign currency exchange rates is
not expected to be material to our results of operations, cash flows or
financial condition. Due to the short duration of our investment portfolio, an
immediate 10% change in interest rates would not have a material effect on the
fair market value of our portfolio. Therefore, we would not expect our operating
results or cash flows to be affected to any significant degree by the effect of
a sudden change in market interest rates on our securities portfolio.

Foreign Currency Exchange Risk

     We are an international company, selling our products globally and, in
particular, in Japan, Korea, the People's Republic of China and Taiwan. Although
we transact our business in United States dollars, we cannot assure you that
future fluctuations in the value of the United States dollar will not affect the
competitiveness of our products, gross profits realized, and results of
operations. Further, we incur expenses in the People's Republic of China, Taiwan
and other countries that are denominated in currencies other than United States
dollars. We cannot estimate the effect that an immediate 10% change in foreign
currency exchange rates would have on our future operating results or cash flows
as a direct result of changes in exchange rate. However, we do not believe that
we currently have any significant direct foreign currency exchange rate risk and
have not hedged exposures denominated in foreign currencies or any derivative
financial instruments.

                           PART II: OTHER INFORMATION


ITEM 1:   LEGAL PROCEEDINGS

               None

ITEM 2:   CHANGES IN SECURITIES AND USE OF PROCEEDS

               None

ITEM 3:   DEFAULT UPON SENIOR SECURITIES

               None

ITEM 4:   SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

               None

ITEM 5:   OTHER INFORMATION

               None

                                       20

<PAGE>

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits

     Exhibit No.         Exhibit Description
     ----------          -------------------

       10.17             Promissory Note entered by and between Jack Guedj and
                         Registrant dated April 11, 2001

     (b)  Reports on Form 8-K

     The Company did not file any reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended June 30, 2001.

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                TVIA, INC.


August 7, 2001                  By:          /s/    Michael Hoberg
                                               -------------------------
                                                    Michael Hoberg
                                                Vice President of Finance,
                                          Chief Financial Officer and Secretary
                                            (Principal Financial Officer and
                                                Duly Authorized Signatory)

                                       21

<PAGE>

                           EXHIBIT INDEX TO TVIA, INC.

                          QUARTERLY REPORT ON FORM 10-Q

                       FOR THE QUARTER ENDED JUNE 30, 2001



     Exhibit No.         Exhibit Description
     ----------          -------------------

       10.17             Promissory Note entered by and between Jack Guedj and
                         Registrant dated April 11, 2001

                                       22